The history of Bitcoin and other cryptocurrencies, despite their still young age, is very rich in events and incidents, just like anything associated with big money, which can very easily change its owner. This new technology, which is gaining more and more popularity every day, attracts not only solid and law-abiding citizens.
It is possible that the “dark side” of the cryptocurrency economy is actually the underwater part of the iceberg, which is several times larger than the visible activity on exchanges, exchanges and the many stores that accept Bitcoin for payment.
As we know, one of the main distinguishing features of cryptocurrencies in relation to fiat is maximum anonymity. And it attracts not only hackers, but also “ordinary” fraudsters and scammers who prefer to remain in the shadows when making dubiously legitimate transactions.
It was the emergence of bitcoin that made possible the emergence of black markets selling illicit goods online, 24 hours a day, around the world. But as it turned out, law enforcement was well prepared for the new challenge. After several high-profile arrests of the owners and customers of these resources, most of the most notorious black markets have been shut down.
Another reason for the high criminal activity around cryptocurrencies is the poor security infrastructure and carelessness of most users. People find it psychologically hard to get used to the fact that money can be stored not in a bank account (even with online access), but in ordinary files on the drive of the home computer.
In the four years since bitcoin became known to the general public, the amount of money lost in the world of cryptocurrencies due to various kinds of illegal actions has long exceeded one billion dollars. Tens of thousands of people said goodbye to their savings, “rewarding” scammers and hackers who attacked various exchanges, online wallets and other resources that use cryptocurrencies.
Others bought non-existent hardware or cloud contracts to mine, or failed to get mined coins from closed pools. Others invested in stock exchanges and funds that turned out to be pyramid schemes. Many have lost their bitcoins to online casinos that are banned in their country.
There are probably a lot of unreported fraud cases, and information about scams that are extremely hard to prove or verify. Therefore, all these figures are likely to be only the lower limit of the. In reality, the size of losses in the cryptocurrency community can be much higher.
The “dark” side of cryptocurrencies
Cryptocurrencies, mainly Bitcoin, are extremely popular on various “dark net” services – DarkNet – and are the main way of making payments there. This is due to the fact that users of such sites primarily need anonymity and uncontrollability. It is quite obvious that some of the first people to seriously use bitcoins were sellers of weapons, drugs, and other black market “pleasures.
The problem with these sites is that they cannot be accessed in the normal, traditional way using a web browser.. To be able to plunge into the depths of the darknet, you need to install special software – for example, Tor.. With the development of cryptocurrencies, black markets got a new breath. The way money is sent anonymously, and the idea of decentralized currency itself, has greatly reduced the possibility of control by governments and intelligence agencies.
“Darknet’s Silk Road
The most telling was the story of the Silk Road online market, which everyone who deals with cryptocurrencies knows about. The main feature of the site was the use of Bitcoin, which for most people was a “dark horse” at the time, and the ability to pay for purchases through the anonymous Tor network.
Silk Road gained real popularity precisely because of the opportunity to buy a variety of “substances”, and in addition to them sold pirated software, stolen goods and a huge number of other illegal goods.
But the U.S. intelligence agencies proved to be no slouch either – after nearly two years of investigation, Silk Road owner and administrator William Ross Ulbricht was arrested in October 2013, along with several of his employees and dealers later.
The Silk Road’s creator adhered to a certain code of ethics – in particular, prohibiting him from selling guns and the services of hitmen. But that didn’t help his sentence – he got two life sentences and a few dozen years in addition.
Silk Road followers
Such a tidbit as the illegal trade could not remain untouched. Silk Road 2.0 took the baton first, and then a few other similar sites. However, the Silk Road reincarnation turned out to be a secret service trap. One of the confidants of the site’s creator, Blake Bentall, who had been working from the beginning was an FBI agent. So they wanted to fish out the major dealers, and they succeeded.
Another follower of Ulbricht’s idea was the Evolution black market. But he didn’t live long either.. In March 2015, the administrator of this resource suddenly disappeared, taking about $12 million with him. He argued that this was due to “technical problems” and then a few days later the site simply went offline, along with the money of sellers and buyers.. This event caused panic on the black market, but the information that the security services had a hand in the closure has not been confirmed.
The interesting thing is that of the many illegal markets on DarkNet, Evolution had the reputation of being the most reliable. There was a tripartite signature for each payment – the transaction had to be confirmed by the buyer, the dealer, and the administration of the forum. Another “thing” about this market is that there was essentially no moral framework when it came to the type of product. There was a much wider range of goods and services available at Evolution, including kompromat.
Sheep Marketplace was next to close. They say it was because of hacking, which is very doubtful, because even a week before it was stopped withdrawal from the resource. The amount stolen is also impressive – more than 150,000 BTC totaling about $40 million.
In addition to the above resources, we can highlight the online marketplace Agora. It is now the biggest market on the DarkNet for drug distribution, and its popularity is skyrocketing.
There are also “specialized” black markets devoted entirely to one type of illegal trade. For example, the Darkleaks website uses its own blockchain to transmit a variety of private and confidential information. It was the Darkleaks black market that was one of the first to put into practice a blockchain similar to the Bitcoin blockchain for other needs unrelated to financial transactions.
Exchange scams and heists
Back in 2011, the first victims of hackers were the largest Bitcoin exchanges at the time, Bitcoinica and Tradehill, but almost no details are available – Bitcoin was not well known then, and there was almost no media coverage of these incidents.. In 2012 there was a successful attack on BTC-e, which paid the losses out of its own pocket.
The first Bitcoin price collapse was due to the MtGox hack in June 2011. But compared to the final collapse of this exchange, it seems like a minor episode. The bankruptcy of MtGox in early 2014 can rightly be called the “crime of the century,” and not only in the narrow world of cryptocurrency. 650,000 BTC – about $480 million as of February 2014, and now $130 million – disappeared without a trace, and after a year and a half, no progress has been made in solving the case. Who should answer to tens of thousands of customers? Mark Karpeles, the darknet sharks who hid behind his name, or an unusually nimble group of hackers? For now, it’s as rhetorical a question as, for example, “who killed JFK?”
But there have been many “smaller” hacks as well – earlier this year a hacker attack on the largest Bitstamp exchange resulted in the theft of just under 20,000 BTC, which was then over $5 million, after which the exchange temporarily suspended operations for a security audit.
Already this year, major altcoin exchange Bter has been in trouble twice. First there was the theft of about 50 million NXTs, which was the equivalent of about $1.65 million. However, soon the administration of the exchange managed to “negotiate” with the hacker, and almost all the amount, except for 8 million NXT, was returned.
The second blow turned out to be fatal – more than 7,000 BTC were stolen from an insufficiently “cold” wallet.. As a result, the exchange was forced to close, distributing the remaining assets to customers. Until that time, China’s Bter had maintained a reputation as one of the most reliable altcoin exchanges, and the storage of funds in cold wallets was considered quite secure and reliable.
Information about thefts from cryptocurrency exchanges is not uncommon, but it is actually very difficult to verify whether it is really the result of hacking attacks. It is possible that unscrupulous creators of stock exchanges themselves conceived a scam and brought it to life, “consoling” depositors with the fact that there was a hack. Or maybe some of the news about hacks is just an attempt to smear competitors and a way to attract attention? However, the fact remains that money from cryptocurrency exchanges disappears from time to time, and their customers need to be careful.
Not only exchanges can be hacked, but also pools. Once one of the top five largest pools, 50BTC.com was considered reliable, but on October 18, 2013 it stopped paying rewards to miners. For a while the administration was talking about technical problems, but then they reported a hack, which resulted in the theft of about 1,500 BTC.. The pool lost almost all miners and closed after a while. Whether there really was a break-in, no one knows.
In June 2013, a large Litecoin mining pool – ltcmine.ru – as a result of the owner’s negligence, after incorrectly updating the wallet, the clients’ balances were credited with amounts exceeding the real ones by hundreds of times. The first lucky ones, seeing the money “fall from the sky,” immediately took it out, leaving everyone else at the bottom of the barrel.. In total, up to 13,000 LTC. However, there are other versions of the case.
Pyramid builders and air sellers
Cryptocurrencies, just like any other complex and incomprehensible technology, are surrounded by a host of myths. Badly informed people often refer to Bitcoin as a pyramid scheme.
While these opinions are not valid, cryptocurrencies are actually very convenient for pyramid building. The first to realize this was American Trendon Shavers, who created the Bitcoin Savings and Trust. Of the bitcoins he received from depositors, he paid some of them out as interest, and he used the rest to live at his own pleasure, arguing that they were not money, so he had not committed any crimes. However, the judge disagreed with him, and Shavers went to jail.
Another giant pyramid scheme, with losses on a scale comparable to the MtGox disaster, appeared in late 2014 in Hong Kong. It was a pseudo-exchange MyCoin, which collected money, promising payback in a few months, and then the fabulous profits. All the signs of a pyramid scheme were there – promises of super profits, gifts for those who give money “right now,” a bonus for driving other customers. However, there were many people who invested hundreds of thousands of dollars in this venture.. The total amount was almost 390 million HKD.
And in February 2015, when the police became interested in MyCoin, its owners took the money and disappeared, placing the hired employees, who knew nothing about the fraud, under the hammer of justice.. The perpetrators have not yet been found.
Virtual mining
Miners have also fallen victim to scammers. So, in 2013-2014, a lot of virtual ASIC-mainer preorder vendors appeared, creating a beautiful website, putting up images of non-existent devices drawn in an editor, and collecting money for preorders.
Gullible people during the rise of Bitcoin and the hype around mining didn’t take long to place orders, making non-refundable payments to the scammers’ wallets. Of course, they didn’t get any equipment or money. Smaller scammers sold fictitious “hardware” through advertisements or took money for shipping from China real-life miners, and then disappeared in exactly the same way.
Melting Clouds
Recently, pyramid creators found another fraud scheme – the sale of fictitious cloud mining contracts. Indeed, what could be easier? They create a website that advertises an allegedly existing data center and promises profitable (but not too profitable) conditions for mining, and start selling contracts.
Since the average payback time of real-world mining is 4-6 months, the scammers have no hurry. They simply pay the victims some of their own money, continuing the advertising campaign and luring in new customers, or old ones, to “reinvest the profits.”
Such pyramid schemes can exist for many months and gain a reputation for reliability. And only when the flow of payments begins to dry up do they curtail their activities and disappear with the money. And the first customers who invested in the beginning can even make a profit, as it is more profitable for fraudsters to pay a “small share” than to deserve suspicion beforehand. Examples of such services are HashProfit and cointellect.com.
One of the largest cloud pyramid schemes was BitcoinCloudServices, which existed for about a year and stopped payments in May 2015.. The number of victims and the amounts lost are still unknown.
High-risk investments
Among other pyramids, it is impossible not to mention their HYIP – High Yield Investment Project, which are currently gaining more and more popularity. There are plenty of HYIPs that accept cryptocurrencies, ranging from Bitcoin to little-known altcoins.
The scheme of HYIPs is quite simple – a user invests real money into his account and gradually receives interest from his deposit. And the creators of HYIPs often announce in advance that the scheme is a pyramid, but the first invested can get a large (percentage) profit.
HYIPs are characterized by very attractive “promises”, up to several hundred percent daily (so-called “dabblers”). In fact, the conditions in different HYIPs can vary dramatically, but the main feature is that the creators entice users to invest in their child as much money as possible, motivating them by the huge percentage of payments from the amount paid.
The creators use big advertising slogans and branded promises to lure in the required number of depositors, make a few payouts and then, with a clear conscience, “shut down” their project, leaving the customers’ money in their purses.
You have to understand that the money for dividends is taken not from creators pocket, but from investors pocket, i.e. in fact the HYIP exists and pays out only until the inflow of new users, and as soon as it is slowed down or stopped, the HYIP will simply disappear with all accumulated deposits.
The depositors can also gain good profits, if they pay their money immediately after the opening of the HYIP. But if you give in to greed just a little bit and “take your time,” then there is a very high chance of losing all of your investments and savings.
Anyone who has a wallet with popular cryptocurrencies can try to invest in such services at any time, literally in one click. The special attraction is that the payment is anonymous and is often credited to your balance in a matter of minutes. But it should be understood that the chance of predicting behavior and the probability of “winning” in a particular HYIP is approximately equal to the reliability of fortune-telling and does not depend on the type of coffee.
Ransomware viruses and miners
Virus writers have discovered Bitcoin. The anonymity of cryptocurrencies is especially beneficial for so-called “ransomware” – that is, ransomware viruses. These viruses, when infiltrating the victim’s computer, stealthily encrypt files and documents, and then display a warning on the screen, demanding a ransom in Bitcoin for providing the decryption key – otherwise, all the user’s files become useless garbage. Based on the name of the first of these Trojans, the new class of threats is called CryptoLocker, but now there are many such viruses. Even police officers became victims of cryptolockers. There are various remedies against them, but the main struggle is yet to come.
There is a “less harmful” malware-miner, which is a Trojan that runs a mining program on the victim’s computer, exploiting the victim’s processing power for its own purposes. Such “sins” became famous for some companies that produce games and various software, embedding such Trojans in their clients. There have been some fairly well-known companies caught up in this.
Gambling
Two or three years ago, online casinos and various sites offering gambling not with fiat money, but with the gaining popularity of cryptocurrencies began to appear online. One of the first online casinos that became popular was SatoshiDice. There are a lot of stories about trying to cheat the system, as well as big bets, both winning and losing, associated with it.
We should immediately divide the casinos that work with popular cryptocurrencies into two groups: the first is the usual online casinos that simply accept cryptocurrencies as one of the ways to deposit and withdraw funds; the second group is the casinos that were originally created to play with cryptocurrencies.
If with the first group everything is more or less clear, the second group is much more interesting. These sites usually support technology Provably Fair to be able to check the bets and the game itself on the fairness. Players are given the opportunity to use unique hash signatures, through which at any time you can check your bets and make sure the integrity of the site and the absence of certain tricks, which often sin traditional online casinos.
To recap
We can say that the world of cryptocurrencies is a very new and very dynamic market with its own peculiarities that are unique to it. There’s plenty of room for all sorts of scams. Many of them end successfully because the criminals retain the advantage of anonymity. You can’t get a refund if you made a mistake. It is practically useless to complain if you have been cheated. You are in complete control of your money, but you also have sole responsibility for keeping it safe.
Even a simple disregard for basic safety and security can have unpredictable consequences, because if someone has access to your money, there’s a good chance you’ll never see it again. The most important thing to remember is that you should do everything deliberately. Take care of your wallets!